## Types of Tokens


### Rebase vs. Reward-Bearing Tokens


#### - Rebase Tokens

A rebase, or rebasing, token is a cryptocurrency designed with an algorithmically adjustable supply to help stabilize its price. The supply of a rebase token may experience high volatility, yet its price often remains stable, contingent on the price of the asset it is designed to track.

stETH, for example, consists of a ‘transferable rebasing utility token’ that represents a proportion of the total ETH staked through Lido. stETH balances are updated daily to reflect the staking yield [1]. As a result, holders of these liquid staking rebase tokens receive rewards in new tokens, while the exchange rate remains the same.

However, sometimes rebase tokens face challenges when it comes to integrating smoothly with other DeFi protocols, due to constantly changing supply metrics. This lack of DeFi composability can limit their adoption and application in other protocols, including lending, borrowing and yield platforms.

#### - Reward-Bearing Tokens
A reward-bearing token represents a cryptocurrency whose value increases over time through a dynamic exchange rate, despite its amount remaining constant.

Liquid staking reward-bearing tokens accrue staking rewards, reflected on an increasing exchange rate. In Ankr’s case, users receive ankrETH, a reward-bearing token, for staking ETH. These ankrETH tokens follow a 1:1 ratio with users’ staked assets. When stakers redeem the position, they receive back the original staked assets, in addition to the accumulated staking rewards [2].

Reward-bearing stablecoins are backed by overcollateralized reward-bearing assets, such as LSTs or LRTs, whose staking rewards are distributed to the stablecoin holders. These tokens achieve peg stability by locking the collateral in smart contracts, which dynamically adjust collateral ratios and manage the issuance and redemption of the stablecoin based on prevailing market conditions [3].

### Native vs. Non-Native Tokens

#### - Native Tokens
Native tokens represent assets that are intrinsic to a blockchain’s infrastructure or are directly created by smart contracts on the blockchain itself without external intervention. These tokens are closely tied to the core functionalities and security of the blockchain [4].
*For this research, native tokens were considered to be all the tokens that can be natively minted on a specific blockchain, in addition to gas tokens.

**Characteristics**:

1. **Integration at the blockchain level**: Native assets are deeply integrated into the blockchain’s architecture. For Ethereum, for instance, ETH is the prime example, as it’s minted with each block’s creation and used for transaction fees and network operations.

2. **Direct Minting**: A distinctive feature of native assets is that they can be minted directly on the blockchain. USDC is a good example, as it’s minted directly by Circle on various blockchains including Ethereum and Solana. As a result, it’s considered a native asset to multiple blockchains.

3. **Liquidity and Transferability**: Native assets typically experience higher liquidity on their ‘home’ blockchain, facilitating DeFi composability, integrations in other protocols and adoption.

4. **Cross-chain Limitations and Solutions**: Native tokens face some limitations when it comes to moving across different blockchains, mainly due to incompatible standards. In order to solve this issue, some third-parties may create a wrapped version or equivalent of the token that complies with the destination blockchain’s standards.

#### - Non-Native Tokens
Non-Native tokens include any asset that must be either wrapped or validated by a third party before they can interact with the blockchain. These tokens are not inherently integrated into a blockchain’s architecture like native tokens. Instead, non-native assets, often referred to as wrapped tokens, exist on the blockchain but need an additional layer of validation or conversion to operate within that blockchain environment. Examples of these include wBTC and wMATIC, which have been wrapped into a standard token format, such as ERC20 on Ethereum.

**Characteristics**:

- **Cross-Blockchain Functionality**: Wrapped tokens can be used within ecosystems of other blockchains, thereby increasing interoperability among different networks.

- **Third-Party Involvement**: The creation and management of these tokens involve third-parties, responsible for handling the wrapping process, maintaining the necessary reserves and ensuring that the tokens on the blockchain accurately represent the original assets.

- **Cross-chain Liquidity and Functionality**: Users are able to leverage the strengths of a multitude of blockchains, without the need of transferring assets between wallets or exchanges directly. The liquidity of non-native tokens is spread across the blockchains supported.

- **Example of a use case**: Bitcoin doesn’t natively exist on the Ethereum blockchain. In order to use bitcoin on Ethereum’s ecosystem, it must be first wrapped into wBTC.

## Importance of Native Yield-Bearing Assets

Most Layer 2s still do not provide any yield on assets. While ETH staked on Layer 1s can yield approximately 4% APY, bridging liquid ETH to Layer 2s currently yields nothing on many chains. The same is true for stablecoins, which do not generate returns on the majority of either Layer 2s or Layer 1s [5].

However, some Layer 2 solutions have recently emerged to provide users with native yield generation on their ETH and stablecoin holdings directly on the network. This represents a significant development as it offers a source of passive income without requiring involvement in separate staking or yield farming protocols [6].

### Benefits of offering Native Yield-Bearing Assets

- **Increased Network Security and Participation**: Native Liquid Staking Reward-Bearing Tokens provide staking rewards to users, who are incentivized to retain their assets for longer periods of time in a specific network. Thus, it significantly increases security and stability mostly in POS chains.

- **Enhanced User Engagement and Loyalty**: By receiving rewards for holding or using certain assets, users are more likely to remain engaged with the network. This can increase user retention and deepen loyalty to the blockchain or its projects, as stakeholders benefit directly from the ecosystem's growth and success.

- **Economic Stability and Growth**: Reward-bearing assets can help stabilize the economy of a blockchain by providing consistent returns to holders, which can mitigate market volatility. Additionally, these rewards can encourage more transactions and interactions within the ecosystem, fostering further economic activity and growth.

- **DeFi Composability and Ecosystem Development**: Reward-bearing tokens are particularly attractive to be used as collateral within the DeFi ecosystem. Rewards can also incentivize liquidity provision, critical for the efficient operation of trading platforms and other DeFi platforms on the blockchain.

### Capital Efficiency

Reward-bearing assets are designed to maximize the utility of capital. Holders are not only able to earn passive income through yields - often derived from staking or lending activities - but also benefit from the potential appreciation in the asset's value (in the case of LSTs and LRTs).

This dual benefit streamlines capital allocation by allowing investors to derive multiple types of returns from a single position. Additionally, the ability to use these assets in various DeFi protocols without needing to liquidate them adds a layer of flexibility. This means that capital can remain productive in one form while still being used as collateral or for liquidity provision in other DeFi platforms.

zkLink Nova, for instance, plans to incorporate an ERC-20 Token Aggregation mechanism, where native Layer 2 assets from multiple chains can be deposited into zkLink and traded with each other with interoperability. This feature allows for additional capital efficiency among many DeFi applications and creates a variety of use cases. The token aggregation mechanism would be also applied to reward-bearing tokens, such as LRTs and LSTs, significantly increasing earning opportunities on zkLink Nova [7].

### Reduced Liquidity Fragmentation

One of the critical challenges in DeFi is liquidity fragmentation, where capital is spread across multiple LSTs, LRTs, and stablecoins within the same network. Native reward-bearing assets address this issue by incentivizing users to retain these specific tokens for extended periods. The longer holding periods are usually encouraged through mechanisms such as higher yield rates for longer staking terms. It’s also easier for the chain to incentivize users to hold, trade, or even set up pools against their native reward-bearing tokens, for instance, through a points mechanism.

### Specific Cases

#### - Blast
Blast is an EVM-based optimistic rollup offering native yield to depositors. The yield on Blast is generated from ETH staking and RWA protocols. This yield is automatically distributed to Blast users from these decentralized protocols. While the default interest rate on other L2s remains at 0%, Blast offers 4% for ETH and 5% for stablecoins.

According to l2Beat and as of May 20th, Blast has a total TVL of approximately $2.7B, from which $355M come from USDB (Blast’s native yield-bearing stablecoin) and around $2B from WETH. Please note that, within the network, WETH and ETH are most of the times used interchangeably. The only difference is that ETH’s contracts have disabled yield by default, while WETH and USDB have automatic yield for both EOAs and smart contracts. According to Blast’s documentation, however, ‘ETH itself, not WETH stETH or other ERC-20 token, is natively rebasing on the L2’.

By holding ETH or WETH on Blast, users get Lido’s yield plus blast points. As a result, this could be one of the reasons behind Blast achieving 4th place among Layer 2s with the highest TVL.

![pWfCh4rLOqO5Ae3-5NtHMyYCxvLV-_kNX6_kzuBR420.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/p_Wf_Ch4r_L_Oq_O5_Ae3_5_Nt_H_My_Y_Cxv_LV_k_NX_6_kzu_BR_420_d05fc2b179.png)
_Figure 1 – Blast TVL Breakdown_

![oTx1u7L5_lwopNZTRcZ2Gtdwo3D7eosgGVuZKl8v_yk.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/o_Tx1u7_L5_lwop_NZT_Rc_Z2_Gtdwo3_D7eosg_G_Vu_Z_Kl8v_yk_e13a66553f.png)
_Figure 2 – Blast TVL Breakdown_

#### - Mantle

Mantle network is an EVM-compatible chain with modular architecture, that combines an optimistic rollup with various data availability solutions. As reported by l2Beat on May 20th, Mantle's TVL stands at around $1.13B, of which $377M are attributed to Mantle Staked Ether (mETH) – a reward-bearing liquid staking token. Users are able to stake ETH on mainnet and receive mETH directly on Mantle Network, to start exploring the ecosystem, while consistently earning rewards simply by holding the token. In these particular cases, users are no longer incentivized to hold ETH, because it doesn’t generate any internal yield.

![uNex7aKXcPPhODIPUMjRERtypfQBNYxNq9o0e_Zq1s8.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/u_Nex7a_K_Xc_P_Ph_ODIPU_Mj_RE_Rtypf_QBN_Yx_Nq9o0e_Zq1s8_c628266b6a.png)
_Figure 3 – Mantle TVL Breakdown_

![3NeTlNLZFr4PWeo6uTUIuvQ3FCvu1bhXlxf5pOkfyc0.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/3_Ne_Tl_NLZ_Fr4_P_Weo6u_TU_Iuv_Q3_F_Cvu1bh_Xlxf5p_Okfyc0_393a334988.png)
_Figure 4 – Mantle TVL Breakdown_

#### - Swell L2

Swell L2 is a restaked rollup built on the Polygon CDK, using EigenDA and the Polygon AggLayer in addition to AltLayer, Chainlink, and Redstone.

As of May 20th, Swell L2 had already secured $1.4B in pre-deposits, potentially making it the fifth-largest L2, behind Arbitrum, Optimism, Base and Blast. Swell decided to use its liquid restaking token, rswETH, as the native gas token of the chain. This enables users to accrue 4x Pearls and EigenLayer points, in addition to participating in Swell L2 airdrops.

#### - Fraxtal
Fraxtal is a rollup equivalent to EVM that uses the OP stack for its smart contract platform and execution environment. According to l2Beat, Frax’s yield-bearing stablecoin, Staked Frax (sFRAX), has a TVL of about $6M. Staked FRAX (sFRAX) is an ERC4626 staking vault that allocates a portion of the Frax Protocol yield to stakers on a weekly basis, with payments made in FRAX stablecoins. The sFRAX token represents proportional deposits in the vault and can be exchanged for FRAX stablecoins at any time at the proportional rate.

Frax also launched frxETH, a token pegged to and with a similar amount of circulation as ETH. However, frxETH on its own does not accrue any yield. In order to solve this issue, Frax revealed sfrxETH to share the staking yield from Frax ETH Validators with token holders. Users can convert frxETH to sfrxETH at any time by depositing it into the sfrxETH vault, enabling them to earn staking yields on their frxETH. As validators accumulate staking yields over time, an equivalent quantity of frxETH is created and added to the vault. This process allows users to withdraw more frxETH than they initially deposited when they redeem their sfrxETH. According to the previous sources, sfrxETH has a TVL of approximately $9.19M.

![yW1owQ0qUiXvCisdPz9qVRE5n_5Q2PBdohaGCbLzdiU.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/y_W1ow_Q0q_Ui_Xv_Cisd_Pz9q_VRE_5n_5_Q2_P_Bdoha_G_Cb_Lzdi_U_b47d0599da.png)
_Figure 5 – Fraxtal TVL Breakdown_

![r9kZQJxHyslAPaCq5xnQuK-W8deOwH_IkeEtWZVSCwg.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/r9k_ZQ_Jx_Hysl_A_Pa_Cq5xn_Qu_K_W8de_Ow_H_Ike_Et_WZVS_Cwg_c15c25133c.png)
_Figure 6 – Fraxtal TVL Breakdown_

## Conclusion
Native reward-bearing assets are of the utmost importance for L2s because they address fundamental challenges such as scaling, capital efficiency, and liquidity. By incentivizing long-term holding and active participation, these assets directly contribute to the robustness and maturity of L2 ecosystems.

It's also important to note that the Market Capitalization to TVL ratio of any L2 is significantly higher than the same ratio for issuers of reward-bearing assets, such as Liquid Staking or Liquid Restaking protocols. For instance, the ratios for Optimism [13.27], Mantle [22.29], and Manta [9.83] are at least 80 times higher than those for Lido [0.06], RocketPool [0.11], or Ether. fi [0.1]*. This indicates that it is much easier for a chain to increase its Market Capitalization relative to the same growth in TVL compared to a Liquid Restaking or Liquid Staking protocol.

_*these ratios were calculated based on CoinMarketCap and CoinGecko data._

#### References

[1] - _[https://blog.lido.fi/steth-the-mechanics-of-steth/](https://blog.lido.fi/steth-the-mechanics-of-steth/)_
[2] - _[https://www.ankr.com/docs/switch/overview/](https://www.ankr.com/docs/switch/overview/)_
[3] - _[https://www.gate.io/learn/articles/lst-backed-stablecoins-a-new-frontier-in-defi-innovation-and-opportunity/2200](https://www.gate.io/learn/articles/lst-backed-stablecoins-a-new-frontier-in-defi-innovation-and-opportunity/2200)_
[4] - _[https://lifi.substack.com/p/what-is-this-asset-lifi-explains](https://lifi.substack.com/p/what-is-this-asset-lifi-explains)_
[5] - _[https://mantanetwork.medium.com/new-paradigm-the-real-l2-that-helps-you-earn-more-yield-than-a-multisig-2f445ab4dc47](https://mantanetwork.medium.com/new-paradigm-the-real-l2-that-helps-you-earn-more-yield-than-a-multisig-2f445ab4dc47)_
[6] - _[https://www.kucoin.com/learn/crypto/top-crypto-projects-in-blast-layer-2-network](https://www.kucoin.com/learn/crypto/top-crypto-projects-in-blast-layer-2-network)_
[7] - _[https://blog.zk.link/token-merge-unifying-aggregated-assets-from-ethereum-ethereum-layer-2s-on-zklink-nova-ade9cf3811fb](https://blog.zk.link/token-merge-unifying-aggregated-assets-from-ethereum-ethereum-layer-2s-on-zklink-nova-ade9cf3811fb)_



Native reward-bearing assets are crucial for L2s, addressing challenges like scaling, capital efficiency, and liquidity. Discover in this post how these assets are revolutionizing the Defi Landscape.

large_unnamed.png

medium_unnamed.png

small_unnamed.png

thumbnail_unnamed.png

unnamed.png

The Importance of Native Reward-Bearing Tokens

large_tagus_icon_colorful_f313908fa2.png

medium_tagus_icon_colorful_f313908fa2.png

small_tagus_icon_colorful_f313908fa2.png

thumbnail_tagus_icon_colorful_f313908fa2.png

tagus_icon_colorful_f313908fa2.png

Tagus Labs is a venture studio dedicated to unlocking the full potential of Liquid Staking Tokens (LSTs) and Liquid Restaking Tokens (LRTs).

Our goal is to shape the groundbreaking LSTFi & LRTFi ecosystem.

Tagus Labs

EigenLayer has recently announced the release of their protocol token: $EIGEN. The claim for this airdrop is now open, rewarding its early supporters and stakeholders. 

This blog post will guide you through the details of the EigenLayer airdrop, offering a comprehensive overview of everything you need to know.

## What is EigenLayer?

[EigenLayer](https://www.eigenlayer.xyz/) is an Ethereum middleware protocol that aims to improve the security and scalability of the network. It accomplishes this by allowing stakers to repurpose their staked ETH to restake it with their smart contracts that will act as validator consensus for numerous dApps & protocols. Thus, users will be rewarded for staking their assets with two network layers.

This feature dramatically increases yield prospects for stakers by allowing them to earn rewards from multiple sources at the same time. Furthermore, by allowing the reuse of staked ETH, EigenLayer helps to build a more robust and secure network, ensuring that Ethereum remains resilient and efficient. The protocol's unique approach not only improves the utility of staked assets but also strengthens the Ethereum ecosystem's overall stability and security.

## The $EIGEN Token Airdrop

The $EIGEN token airdrop is a key component of EigenLayer's aim to decentralize governance and reward its community. The $EIGEN token serves multiple roles in the EigenLayer ecosystem, primarily as a utility and governance token. It gives holders voting rights on key decisions and potential staking rewards, encouraging active community participation in the protocol's future direction.

![unnamed.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/unnamed_bc31ea0be1.png)
_([Source](https://x.com/eigenfoundation/status/1788977883400015996))_

## The $EIGEN Token

The $EIGEN token is referred to as a 'universal intersubjective work token,' which means it must be staked to perform various network functions. These tasks include applying penalties, or 'slashing,' on nodes that exhibit non-compliant behavior. While Ethereum's inherent staking mechanism can penalize errant users in order to safeguard the network, $EIGEN expands this feature to handle behaviors that are not directly observable on-chain, known as 'intersubjective' faults. This includes cases where the blockchain cannot directly monitor compliance and instead requires community or committee oversight.

In this setting, $EIGEN functions similarly to a governance model in which token holders vote on proposals to penalize bad behavior. This system not only imposes penalties but also provides procedures for compensating users affected by others' faults, ensuring a balanced approach to network governance and security. 

![unnamed.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/unnamed_b7939bb715.png)
_([Source](https://docs.eigenlayer.xyz/eigenlayer/overview/whitepaper))_

### Key Features of $EIGEN: 

- **Universality**: $EIGEN is adaptable to a variety of digital tasks, making it a versatile token in the ecosystem.
- **Metering**: It handles the costs of achieving social consensus on intersubjective flaws, ensuring fairness, and preventing abuse.
- **Compensation**: Unlike traditional systems that just focus on penalties, $EIGEN compensates users who are affected by the faults of others.

By incorporating these capabilities, $EIGEN represents a significant step forward in digital platform architecture, extending blockchain technology's utility to a broader spectrum of applications requiring complex human interactions and subjective judgment.

## Step-by-Step Guide to Claiming $EIGEN Tokens

- **Eligibility Check**
First, ensure you are eligible for the airdrop. Eligibility criteria include early participation or contribution to the EigenLayer network. Restakers can check their eligible EIGEN tokens at:

> [claims.eigenfoundation.org](http://claims.eigenfoundation.org)

- **Link Your Wallet**
Visit the official EigenLayer airdrop page and connect your Ethereum wallet. This process will verify your wallet’s eligibility based on past interactions with the protocol.

- **Claim Your Tokens**
Once verified, you will be able to claim your $EIGEN tokens directly from the website. Follow the on-screen instructions to complete the claim process. 

### Key Details for Claiming $EIGEN Tokens

**Claim Window**: May 10, 2024 to September 7, 2024.

**Eligibility**: 

Directly restaked ETH or LSTs on EigenLayer before March 15, 2024, with a 100 bonus token allocation.
LRT users before March 15, 2024, excluding those who enter Phase 2 in mid-June.
Directly restaked ETH or LSTs on EigenLayer between March 15 and April 29, 2024, with a 100 bonus token allocation now and additional rewards in Season 2.

## Staking $EIGEN: What You Need to Know

#### Why Stake?

Staking $EIGEN secures [EigenDA](https://x.com/eigen_da), a high-performance Data Availability system that facilitates Ethereum rollups. Staking options will soon include a wider range of Actively Validated Services (AVSs).

#### Stake Anytime 

You can stake and choose an operator at any time, giving you greater control over your staked assets.

#### Unstake $EIGEN

Unstaking $EIGEN includes a 24-day waiting time, which is required to ensure the ecosystem's security. For further details, see the whitepaper or summary on the EigenLayer website:

> [https://docs.eigenlayer.xyz/eigenlayer/overview/whitepaper](https://docs.eigenlayer.xyz/eigenlayer/overview/whitepaper)

## Important Considerations

It's important to note that:

- The initial $EIGEN tokens are non-transferable. They are intended for governance and will only become transferable after a specific period, as detailed in the project’s roadmap.

- The claim period is limited, so be sure to claim your tokens as soon as possible within the window specified by EigenLayer. Ensure that your wallet is secure and that you are interacting with the official EigenLayer site to avoid phishing attempts.

- This is only the Season 1 airdrop, as future seasons are in the works. EigenLayer plans to allocate a total of 15% of the EIGEN supply across subsequent seasons. These allocations will consider ecosystem participation before and after the March 15 snapshot.

![unnamed.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/unnamed_5af1ce4480.png)
_([Source](https://blog.eigenfoundation.org/claims-s1-p1/))_

One of the Most Significant Airdrops of 2024

While the sentiment around token airdrops can vary, the $EIGEN airdrop represents a significant milestone for EigenLayer's community engagement efforts. 

As the platform continues to develop and add functionalities, the role of $EIGEN tokens could expand, paving the way for more comprehensive user involvement in the ecosystem's governance.


















































EigenLayer has recently announced the release of their protocol token: $EIGEN. This blog post will guide you through the details of the EigenLayer airdrop, offering a comprehensive overview of everything you need to know.

The $EIGEN Airdrop: All you need to know

The introduction of liquid staking derivatives marks a monumental shift towards a more accessible and secure DeFi (decentralized finance) space, enabling investors to participate in Ethereum staking without the need for a substantial upfront investment.

Following Ethereum’s Shapella Upgrade in April 2023, the introduction of LSTs (Liquid Staking Tokens) ushered in a surge of interest in staking, similar to the yield farming craze that occurred during the 2020 DeFi Summer. 

Now, LRTs (Liquid Restaking Tokens) are taking liquid staking derivatives to the next level. Since EigenLayer introduced liquid restaking in June 2023, LRTs have captured the imagination of the DeFi community, garnering over [$8 billion](https://defillama.com/protocols/liquid%20restaking) in TVL (Total Value Locked) in a short period.

As we can see, liquid staking tokens promise an exciting journey ahead for investors keen on optimizing their capital deployment. In this blog post, we will delve into the nature of LSTs and LRTs, their differences, and how they impact the DeFi industry.

## What is Liquid Staking in DeFi?

Liquid Staking in DeFi (LSTfi) refers to a process where users can stake their crypto assets in exchange for Liquid Staking Tokens (LSTs), which represent their staked assets plus potential rewards. 

This mechanism diverges from traditional staking by allowing users to retain liquidity and engage in other DeFi activities without locking their assets in a fixed contract. LSTs provide a means for DeFi users to compound their investments, offering liquidity and composability benefits.

However, this innovation doesn't come without risks. The complexity of the smart contracts involved can lead to vulnerabilities, and the varying quality of collateral pools may introduce additional risks. It’s also vital to choose reliable validators to avoid slashing losses.

## What is Liquid Restaking in DeFi?

Liquid Restaking in DeFi (LRTfi)  takes the concept of liquid staking further. It allows users to stake their LSTs to receive Liquid Restaking Tokens (LRTs), representing a stake of a stake. 

This evolution introduces a dual-yield potential, where investors can earn rewards on both their staked assets and the staking tokens themselves.

While promising increased returns, the process also introduces heightened complexity and security considerations. The layered staking mechanism means more steps and interactions with smart contracts, increasing the risk of exploits and losses.

## LSTfi vs LRTfi: Understanding the Key Differences

The primary distinction between LSTfi and LRTfi lies in the level of abstraction from the original staked asset and the mechanism for generating returns. LSTfi focuses on transforming staked assets into liquid tokens that can still earn rewards, while LRTfi represents a second layer of staking, offering potentially higher yields but with added complexity and risk.

In terms of risk profiles, LSTfi is a more straightforward approach to enhancing liquidity and yield, suitable for those seeking to balance opportunity with risk management. LRTfi, however, appeals to those with a higher risk tolerance and appetite for more complex strategies for potentially higher returns.

- **LSTfi platforms**:

Rocketpool and Lido are among the most popular liquid staking protocols, offering their services to a broad audience. 

Lido has etched its name in the history books after its launch in December 2020. Since then, it has dominated the space becoming the LSTfi market leader, counting a whopping total of [$34,8 billion](https://defillama.com/protocols/Liquid%20Staking) in TVL.

![unnamed.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/unnamed_9da19e5b49.png)
_[1] - Top 5 Current Liquid Staking Protocols on Ethereum by TVL since 2023: April 2024 ([Source](https://defillama.com/protocols/Liquid%20Staking/Ethereum))_

- **LRTfi platforms**:

Platforms like Ether. fi and Renzo are leading the restaking space in TVL, with EigenLayer's mainnet launch in April highlighting the sector's growth. However, up-and-coming protocols like Genesis and InceptionLRT are standing out due to their unique approaches.

InceptionLRT is notable for being one of the only protocols to use [isolated LRTs](https://www.taguslabs.xyz/research/Liquid-Restaking-3-Categories/), positioning itself alongside EigenPie as a leading solution in the space. Genesis, on the other hand, utilizes SSV Node operators for DVT-secured native liquid restaking.

![unnamed.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/unnamed_11ec777b77.png)
_[2] - Rise of Restaking TVL on Ethereum in 2024: April 2024 ([Source](https://defillama.com/protocols/Liquid%20Restaking/Ethereum))_

## Future of Staking and Restaking

The evolution of LSTfi and LRTfi sectors is poised to redefine investment strategies and risk management. As these mechanisms become more integrated and understood, they will continue to impact the liquidity and overall resilience of the DeFi ecosystem.

The future of staking and restaking is not without its challenges, particularly concerning security and user experience. However, as developers and the community learn from each iteration, these models will likely become more robust and user-friendly, paving the way for broader adoption and novel financial products.

As more innovations are introduced, alongside the upcoming EigenLayer mainnet launch, we should expect liquid staking derivatives to continue evolving. As the space becomes more mature, secure, and flexible in terms of investment options, we should see a continued surge of capital flowing into liquid staking derivatives.






As we can see, liquid staking tokens promise an exciting journey ahead for investors keen on optimizing their capital deployment. In this blog post, we will delve into the nature of LSTs and LRTs, their differences, and how they impact the DeFi industry.

Liquid Staking and Restaking in DeFi: LSTfi vs LRTfi

LSTfi is a class of decentralized finance (DeFi) protocols that harness the potential of Liquid Staking Tokens (LSTs). 

## TL;DR: 

- LSTfi protocols are expanding the DeFi ecosystem, unlocking the liquidity of staked assets.
- Several categories of LSTfi exist, including liquidity hubs, lending protocols, derivative platforms, yield optimizers, risk management tools, and insurance platforms.
- Transcending DeFi, LSTfi protocols can enhance multiple industries, including real estate, traditional finance, blockchain gaming, and supply chain management. 
- Lido Finance is the undisputed leader among LSTfi protocols on the Ethereum network, followed by competitors like Rocket Pool and Pendle Finance.
- Jito stands out as the number one LSTfi protocol on the Solana blockchain.
- While technical and regulatory hurdles still need to be overcome, LSTfi has rapidly positioned itself as a cornerstone of DeFi.

By integrating the liquidity and composability of LSTs, LSTfi protocols are redefining financial services within the DeFi ecosystem, offering innovative solutions and enhancing the value of staked assets. 

This article delves into the essence of LSTfi, shedding light on its mechanisms, benefits, and the leading protocols within the space.

## What is LSTfi?

LSTfi represents a subset of DeFi protocols built on top of LSTs — tokens representing staked assets in proof-of-stake (PoS) networks. 

By enabling more efficient utilization of staked assets, LSTfi protocols can enhance yield opportunities while contributing to the robustness and diversity of the DeFi ecosystem. These protocols facilitate new use cases, enhancing competition among validators in PoS networks, encouraging participation in governance, and broadening access to financial services.

![unnamed.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/unnamed_97b852ad32.png)
_[1] - Liquid Staking Visual Representation ([Source](https://www.okx.com/learn/what-is-liquid-staking))_

## Key Components of LSTfi

LSTfi protocols can be categorized into several types, each offering unique functionalities within the DeFi ecosystem:

- **Liquidity Hubs**: Protocols that allow users to supply liquidity to staking pools or liquidity pools tied to LSTs, earning rewards from transaction fees or the yield generated by the underlying assets. Examples include decentralized exchanges (DEXs) or automated market makers (AMMs).

- **Derivative Platforms**: These platforms facilitate the creation and trading of derivative products related to staked assets, such as options, futures, or synthetic assets. They serve as critical tools for risk management and speculation. Notable examples include dYdX and Synthetix.

- **Yield Optimizers**: Protocols that enhance the yield on staked assets by dynamically reallocating them across different staking networks or validators based on various criteria, aiming to maximize returns. Beefy and Yearn are among the leading yield optimizers.

- **Governance Platforms**: These platforms empower users to partake in the governance processes of staking networks or protocols, influencing their development and direction through voting. Discourse and Snapshot exemplify such governance platforms.

- **Insurance Platforms**: Protocols offering solutions like insurance or hedging mechanisms to mitigate risks associated with validator slashing, network disruptions, or price volatility, ensuring added security for users. Examples include Cozy and Nexus Mutual.

- **Cross-Chain Bridges**: Facilitating interoperability between different blockchain networks, these protocols enable the transfer of staked assets or liquidity across chains, enhancing liquidity and accessibility. Stargate by LayerZero is a notable cross-chain bridge.

- **Lending Platforms**: These platforms allow users to lend their staked assets to borrowers, earning additional yield while providing borrowers with liquidity against collateral. Aave and  Compound are prime examples of a lending platform within the LSTfi ecosystem.


## Top LSTfi Protocols

- **Lido Finance**

Lido Finance allows users to stake ETH and receive stETH, a liquid staking token representing their staked assets plus accrued rewards. stETH can be freely used in DeFi, enabling users to maintain liquidity while their capital earns yield.

stETH maintains a peg to ETH, ensuring that users can trade their LSTs across DeFi protocols without losing value relative to their original ETH stake.

Lido Finance is the largest LSTfi protocol with $33,1 billion in TVL (Total Value Locked).

- **Rocket Pool**

Similar to Lido, Rocket Pool offers a decentralized staking service where users can deposit ETH and receive rETH in return. This model promotes accessible staking with the flexibility to use rETH within the broader DeFi ecosystem.

rETH represents the staker's share in the pool, accruing rewards over time, and can be used just like any other token in DeFi applications.

Rocket Pool totals roughly $4,1 billion in TVL, making it the second most prominent LSTfi platform. 

- **Pendle Finance (PENDLE)**

Launched in 2021, Pendle Finance focuses on enabling users to earn fixed yields on their assets, including various LSTs like Frax’s sfrxETH and Lido’s stETH. It provides liquidity, trading yield opportunities, and an AMM for future growth speculation.

Pendle Finance has implemented governance through the vePENDLE token and offers high APYs on certain vaults, such as sfrxETH.

Currently, Pendle counts over $1,9 billion in TVL.

- **Origin Ether (OETH)**

A disruptor in the LSTfi space, Origin Ether allows deposits of ETH and LSTs like stETH, rETH, and frxETH, offering OETH in return. This token represents the holder's stake and yield, deployable across DeFi for maximized returns.

Governed by Origin DeFi Governance (OGV), with strategies generating significant yields and making it a leading yield aggregator in Ethereum.

Origin Ether has accrued over 44,000 ETH within four months of its launch.

- **Jito (JTO)**

Jito has emerged as a leading liquid staking token (LST) provider on the Solana blockchain. It allows users to stake their Solana (SOL) tokens through a process that integrates maximal extractable value (MEV) strategies, optimizing blockchain efficiency and rewards. 

JitoSOL token holders can participate in governance decisions, influencing fee structures, delegation strategies, and the overall direction of Jito's product offerings. 

Jito's TVL currently stands at roughly $1 billion, making it as the largest LST provider on Solana.

![unnamed.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/unnamed_99323c3a7b.png)
_[1] - Liquid Staking TVL Growth since 2021 ([Source](https://defillama.com/protocols/Liquid%20Staking))_

## LSTfi's Industry-Wide Use Cases

LSTfi transcends DeFi, transforming asset management across multiple sectors, including traditional finance (TradFi), supply chain management, real estate, and blockchain gaming.

Traditional Finance could see enhanced liquidity and efficiency in managing bonds, equities, and other assets. Supply Chain Management may also leverage LSTs for asset tokenization, facilitating better tracking and financing.

The real estate industry can also benefit from fractional ownership opportunities via LSTs. At the same time, blockchain-based games can build complex in-game economies by applying LSTfi to NFTs representing in-game assets and virtual lands.

## The Future of LSTfi

Looking ahead, LSTfi is poised for mainstream adoption, with potential integrations into traditional financial systems and expansion across several industries and blockchains.

Collaborations with other DeFi applications could create a unified financial ecosystem, while technological advancements like zero-knowledge proofs and scaling solutions will enhance privacy, security, and efficiency.

Despite facing technical, market, and regulatory challenges, strategic mitigation efforts can secure LSTfi's position as a cornerstone of the future financial landscape. Its commitment to inclusivity, transparency, and accessibility heralds a new era in finance, promising unprecedented opportunities for investment and wealth creation.


LSTfi is a class of decentralized finance (DeFi) protocols that harness the potential of Liquid Staking Tokens (LSTs). 

 Exploring the World of LSTfi: Unleashing Liquidity in DeFi

The introduction of ETH Liquid Staking Tokens (LSTs) and restaking mechanisms is reshaping Ethereum's staking environment, providing stakers with new opportunities for liquidity, yield generation, and network stability. This article looks into the nuances of LSTs, the practice of restaking, and their overall impact on Ethereum's ecosystem.

## TL;DR:  
- LSTs lower the entry barrier to ETH staking, providing liquidity and enabling a wide range of DeFi applications.
- Restaking improves network security and decentralization by enabling LSTs to run a variety of blockchain applications.
- The rise of liquid staking and restaking on platforms such as EigenLayer boosts market liquidity while lowering investment risk.
- New developments in liquid restaking improve interoperability and efficiency within the Ethereum ecosystem, which benefits all participants.

## ETH Liquid Staking Tokens Explained

[ETH liquid staking Tokens](https://defillama.com/protocols/Liquid%20Staking/Ethereum), or LSTs, represent staked ETH and any associated rewards. In order to receive starking rewards on Ethereum, one must operate as a validator node, which requires an investment of 32 ETH. 

The introduction of Liquid Staking has been a game changer, lowering the entry barrier for ETH staking by:

1. Facilitating the Staking of ETH by Individual stakers

2. Outsourcing the function of being a validator node on Ethereum to Liquid Staking node operators, running ETH validator nodes on behalf of all Liquid Staking Protocol’s stakers.

3. Providing ETH stakers with immediate liquidity via DeFi platforms, thereby enabling a wide range of LST applications such as participation in DEXs, lending, borrowing, using as collateral in CDP protocols for stablecoin creation, and engaging in restaking activities.

4. Offering the option to combine ETH yield farming and staking, eliminating the need to choose between the two. This is made possible by allowing LSTs to be reused within the DeFi ecosystem to generate additional rewards.

## Ethereum's Restaking Powered by EigenLayer

Restaking is the process of using LSTs to stake on validators across multiple networks and blockchains in order to maximize returns while also improving network security and decentralization. This approach allows stakers to use their initially staked collateral to support a variety of applications, including dApps and layer-2 sidechains, ensuring transaction security on the Ethereum blockchain.

Restaking is a capital-efficient way to provide crypto-economic security and trust to middleware solutions. [EigenLayer was responsible for introducing the restaking mechanism](https://www.taguslabs.xyz/research/what-is-eigenlayer-what-is-restaking/), which allows ETH and ETH-based LSTs to be restaked through its layer, managed by on-chain decentralized smart contracts. [EigenLayer](https://www.eigenlayer.xyz/) currently enables two different ways to restake ETH: 

1. An "under-the-hood" integration that allows ETH validators to restake their holdings in exchange for EigenLayer access to their credentials, allowing EigenLayer to penalize restakers if necessary.

2. An "over-the-top" approach that allows for the restaking of ETH LSTs through a variety of strategies.

The market share of supported LSTs on EigenLayer is particularly noteworthy. This expansion has resulted in a combined value staked on EigenLayer of over [2.5 million ETH](https://defillama.com/protocol/eigenlayer?denomination=ETH).

This substantial rise underscores the escalating demand for staking opportunities among ETH and LST holders, who are keen on exploring yield-generating avenues.

![EigenLayer_TVL_Growth.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/Eigen_Layer_TVL_Growth_ea619e61c5.png)
_EigenLayers TVL growth in 2024 ([Source](https://defillama.com/protocol/eigenlayer?denomination=ETH))_

![EigenLayer_tokenbreakdown.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/Eigen_Layer_LST_market_share_d5d85b4fcc.png)
_Token Breakdown on EigenLayer - February 2024 ([Source](https://defillama.com/protocol/eigenlayer?denomination=ETH))_

## The Impact of Liquid Restaking

With the emergence of LSTs and the transition to Liquid Restaking, the Ethereum ecosystem has undergone a significant transformation. This shift allows stakers to participate in ETH staking and yield farming at the same time, ushering in a new era with several expected outcomes.

As the presence of LRT protocols on the mainnet grows, we can expect to see a variety of impacts, particularly in terms of the liquidity risk associated with restaking LSTs:

- **Increased Liquidity and Reduced Risk**: The consolidation of all LRT protocols on the mainnet is expected to create a more vibrant and liquid market for these tokens. This improvement in market dynamics is likely to reduce the liquidity risk for LSTs restaked on platforms like EigenLayer, making it easier to convert these tokens into other assets or their original staked tokens.

- **Enhanced Security and Trust**: The full implementation of LRT protocols on the mainnet is supported by extensive testing and security audits. This rigorous approach improves the reliability of these systems, which may encourage more users to restake their LSTs. Such participation is critical to the ecosystem's long-term health and stability.

- **Improved Interoperability and Integration**: The full activation of the mainnet promises improved interoperability between different blockchain networks and protocols. This advancement could simplify the restaking of LSTs on platforms such as EigenLayer, increasing the utility and efficiency of the staking process and benefiting the entire ecosystem.


The introduction of ETH Liquid Staking Tokens (LSTs) and restaking mechanisms is reshaping Ethereum's staking environment, providing stakers with new opportunities for liquidity, yield generation, and network stability. This article looks into the nuances of LSTs, the practice of restaking, and their overall impact on Ethereum's ecosystem.


large_f4691509-9c6d-428e-974b-ad3f4ce982ac.png

medium_f4691509-9c6d-428e-974b-ad3f4ce982ac.png

small_f4691509-9c6d-428e-974b-ad3f4ce982ac.png

thumbnail_f4691509-9c6d-428e-974b-ad3f4ce982ac.png

f4691509-9c6d-428e-974b-ad3f4ce982ac.png

The Impact of Liquid Restaking in the Ethereum’s Ecosystem

EigenLayer’s Actively Validated Services are setting a new standard in the Ethereum landscape by enhancing security and facilitating the seamless integration of innovative protocols. This development is a significant step forward for Ethereum’s ecosystem and opens the door to more permissionless innovation in the future.

## TL;DR:  

- EigenLayer’s Actively Validated Services (AVSs) validate Decentralized Applications (dapps) and systems by leveraging one of Blockchain's Primary benefits, Security.
- By using Ethereum’s trust network, AVSs allow protocols to avoid the need for their own expensive and intricate validator network.
- Ethereum stakers can safeguard AVS protocols with EigenLayer’s staking, which offers higher yield possibilities but carries a risk of validator slashing
- Eigenlayer’s AVS, which securely bridges various Blockchain networks, may hold the key to opening a new era of permissionless innovation.

## Actively Validated Services (AVSs)

AVSs are decentralized applications or systems that operate and validate using the security and trust mechanisms provided by Ethereum’s staking model. 

EigenLayer’s framework allows for the staking of ETH, where node operators can validate both Ethereum’s Proof of Stake Chain and these AVSs simultaneously. This system provides a way to secure AVSs and generate rewards, potentially offering a higher yield than ETH alone.

![AVS_Ecosystem_Before&After.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/AVS_Ecosystem_Before_and_After_3252e23da8.png)
_Comparing the ecosystem of AVSs today and with EigenLayer ([Source](https://2039955362-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FPy2Kmkwju3mPSo9jrKKt%2Fuploads%2F9tExk4U2OdiRKGEsUWqW%2FEigenLayer_WhitePaper.pdf?alt=media&amp;token=c20ac4bd-badd-4826-9fb6-492923741c9e))_

EigenLayer’s AVSs are essential for improving the network’s security and integrity. They take advantage of Ethereum’s shared security to offer innovative use cases that are essential to the ecosystem. 

EigenLayer seeks to address issues like fragmented security and capital costs in the Ethereum ecosystem by allowing validators to take part in the validation process of these services. This creates an environment where validators can freely participate based on risk/reward preferences and enhance the security of AVSs.



## The Benefits of Actively Validated Services (AVSs)

The blockchain landscape can be completely transformed by Actively Validated Services (AVSs), which simplify development, improve security, increase scalability, and optimize resource use.

All of these benefits combine to make AVSs an important development that makes it easier to incorporate new services into the blockchain ecosystem and strengthens the network's overall robustness. 

Let's take a closer look at these main advantages:

1. **Cost-Efficiency**: Typically, launching a new blockchain service requires a considerable investment in setting up a network of validators to ensure the security and integrity of the system. This not only involves technical hurdles but also economic ones, as validators need to be incentivized, usually through token rewards. AVSs remove this barrier by allowing developers to use Ethereum’s existing validator network, thus saving on the costs associated with bootstrapping and operating a new network of validators.

2. **Security**: The decentralized nature of Ethereum's validator base provides a high level of security due to the large amount of staked capital and the distributed consensus mechanism. By using AVSs, new services can tap into this established security framework, benefiting from the collective security efforts of Ethereum's validators without the need to replicate such a system themselves. This borrowed security can help protect against attacks and enhance the overall trust in these new services.

3. **Scalability**: AVSs, by utilizing EigenLayer's shared security and validation services, can scale their operations more easily. They do not have to manage the complex and resource-intensive process of scaling a network of validators on their own, which can often be a major challenge for growing blockchain projects​​.

4. **Resource Optimization**: AVSs enable more efficient use of blockchain resources. By restaking in the EigenLayer ecosystem, validators can participate in securing additional protocols without the need to separate dedicated resources for each service. This leads to a more efficient use of the staked assets and the computational power of validators, optimizing the overall resource utilization in the blockchain network.


## Evaluating the Risks of Incorporating AVSs into Ethereum

Actively Validated Services (AVSs) improve Ethereum, but they also raise questions about power dynamics and governance. The goal is to carefully incorporate AVSs so that they complement Ethereum’s decentralization and community focus and are consistent with the core principles of the network.

The following are a few drawbacks that need to be noted: 

1. **Potential Threat to Ethereum's Social Consensus**: Ethereum founder Vitalik Buterin has raised concerns that projects expanding validator capabilities, like those involved in restaking for AVSs, could pose a threat to the blockchain's "social consensus". This refers to decision-making processes that go beyond just economic stakes and consider broader community perspectives. Powerful projects could exert undue influence over community decisions, potentially undermining Ethereum's neutral status.

2. **Dominance of node Operators**: There's a concern that EigenLayer node operators might gain a dominant position among Ethereum validators. This could give them undue advantage and influence, particularly in practices related to maximal extractable value (MEV), which could impact the fairness and security of the network.

It's important to note that these risks don't negate the benefits of EigenLayer and AVSs, but they do underline the need for careful consideration and responsible management as this technology continues to develop and integrate with the broader Ethereum ecosystem.

## Unlocking Permissionless Innovation

AVSs, or actively validated services, are going to change the blockchain solution market. Through the establishment of safe off-chain connections, which are verified by Ethereum’s extensive ecosystem of validators, AVSs facilitate the smooth implementation of new protocols.

This innovation facilitates the seamless integration of advanced functionalities into the blockchain space by doing away with the time-consuming process of building an independent trust network to achieve protocol security.

![Ethereums_Stack.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/Ethereums_Stack_bd367be423.png)
_Permissionless innovation permeates deeper into the Blockchain Stack ([Source](https://2039955362-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FPy2Kmkwju3mPSo9jrKKt%2Fuploads%2F9tExk4U2OdiRKGEsUWqW%2FEigenLayer_WhitePaper.pdf?alt=media&amp;token=c20ac4bd-badd-4826-9fb6-492923741c9e))_


Overview of AVSs, describing benefits and downsides

large_AVSs_ banner.png

medium_AVSs_ banner.png

small_AVSs_ banner.png

thumbnail_AVSs_ banner.png

AVSs_ banner.png

Understanding Actively Validated Services - AVSs

_As proof-of-stake (PoS) blockchains gain traction, Liquid Staking Tokens (LSTs) have emerged as a transformative solution for traditional staking's inherent illiquidity. Offering readily tradable and DeFi-compatible representations of staked assets, LSTs unlock new capital efficiency opportunities and optimize wealth-building strategies within the staking ecosystem. With the growing interest in the new cryptoeconomic primitive called restaking, it’s expected we see similar adoption for the LRTFi products._

### TL;DR:
- As proof-of-stake (POS) blockchains gain traction, staking has become one of the leading DeFi strategies for investors

- Liquid staking tokens (LSTs) have emerged as a market favorite, addressing the traditional staking inherent illiquidity problem.

- EigenLayer novel restaking primitive introduces a new narrative to this framework by enabling the repurposing of natively staked ETH and ETH LSTs to validate a new set of smart contracts

- LRTs are wrapped tokens that represent the underlying asset value accrued from the restaking rewards to be distributed.

- As the LRT landscape matures, three types of LRTs are emerging to cater to specific user preferences and risk profiles.

### Staking and Liquid Staking Sectors

As [proof-of-stake](https://www.investopedia.com/terms/p/proof-stake-pos.asp) (POS) blockchains gain traction, staking has become one of the leading DeFi strategies for investors. Within this market niche, liquid staking tokens (LSTs) have emerged as a market favorite,  addressing the inherent illiquidity problem of traditional staking.

Revisiting the principles, staking is the method used by POS blockchains to verify their transactions. The process requires investors to lock their coins for some time, and in return receive rewards for their pledge. 

Within the staking market segment, [liquid staking](https://www.techopedia.com/definition/liquid-staking) has risen as a leading solution by addressing the inherent illiquidity limitations of traditional staking. Liquid staking providers enable users to stake their coins, but in return mint a token that represents the staked amount and the corresponding staking rewards. This method has captured significant attention from stakers by offering readily tradable and DeFi-compatible representations of staked assets. Thus, LSTs unlock new capital efficiency opportunities and optimize DeFi strategies within the staking ecosystem.

### The Current State of LSTs: Dominance and Diversity

Observing the current staking landscape, a clear dominance pattern emerges among liquid staking protocols. According to [DefiLlama](https://defillama.com/protocols/liquid%20staking/Ethereum) data, LST protocols currently amass more than $27 billion in total value locked (TVL), which represents almost half of the chain staking TVL:

![3_LRT_Categories_1_463b97a7e9.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/3_LRT_Categories_1_463b97a7e9_8dca3d41ae.png)
_Ethereum Overall Staking Panorama on 6 Jan 2024. [Source](https://www.stakingrewards.com/asset/ethereum-2-0)_

Among liquid staking providers, [Lido Finance](https://defillama.com/protocol/lido) is the leading protocol, with approximately $20 billion in TVL, while the second and third providers, [Rocket Pool](https://defillama.com/protocol/rocket-pool) and [Binance Staked ETH](https://defillama.com/protocol/binance-staked-eth), only record $2.65 billion and $1.37 billion, respectively. The remaining TVL is then split among the other 34 liquid staking protocols. 

In conclusion, there is a noticeable dominance by the market leader, Lido Finance, which holds approximately 31% of the total market share.

### EigenLayer and Restaking: Unlocking Capital Efficiency

[EigenLayer](https://www.eigenlayer.xyz/)'s novel restaking primitive introduces new complexities to this framework. This middleware protocol built atop Ethereum enables the repurposing of natively staked ETH and ETH LSTs to validate a new set of smart contracts. In return for their restake, EigenLayer rewards investors with the fees generated by these smart contracts.

Despite having similar end goals, there are significant differences between the processes of restaking natively staked ETH and restaking an ETH LST. For the first method, to restake natively staked ETH, a user must create an EigenPod, on [EigenLayer dApp](https://app.eigenlayer.xyz/), and connect its staking withdrawal credentials to the EigenPod address. This method is called the “under-the-hood” method. 

![3_LRT_Categories_2_cb92f0a130.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/3_LRT_Categories_2_cb92f0a130_5d835debc2.png)
_Creating an EigenPod to restake Beacon Chain ETH. [Source](https://app.eigenlayer.xyz/)_

On the other hand, to restake an LST, all the user has to do is choose the LST he wants to restake on the EigenLayer dApp and deposit the desired amount. This method is also named as the “over-the-top” restaking.

![3_LRT_Categories_3_1a2d08c694.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/3_LRT_Categories_3_1a2d08c694_e453cadc47.png)
_Restaking an LST on EigenLayer. [Source](https://app.eigenlayer.xyz/token/rETH)_

### Liquid Restaking: EigenLayer Capital Efficiency with Enhanced Liquidity

Similar to Ethereum, EigenLayer doesn’t offer a liquid restaking feature. However, blockchain’s permissionless nature is fruitful in tackling these market inefficiencies and the concept of liquid restaking token (LRT) is already being developed by several other protocols.

Just like LSTs, LRTs are a token that represents the underlying asset value accrued from the restaking rewards to be distributed. Therefore, an LRT can be described as encapsulating the staked ETH amount, along with the staking and restaking rewards, in a single token.

This class of tokens unlocks a new level of capital efficiency, allowing restakers to maintain their liquidity and boost potential returns by leveraging the LRT on any other DeFi endeavor, thus optimizing their DeFi strategies.

### The Rise of Diverse LRT Categories

As we’ve seen earlier, LSTs represent a large part of the overall staking market cap, so it's expected that LRTs have a similar response within the restaking framework. As the LRT landscape matures, several types of LRTs are emerging to cater to specific user preferences and risk profiles.

Here are three key categories:

**I. Native LRTs (nLRTs):**

a. Direct deposit and exchange: Users directly deposit their PoS tokens (e.g., ETH) into the protocol and receive the corresponding native LRT in exchange.

b. Two-step staking:

- Node selection: Users choose a node operator to directly validate transactions on the underlying blockchain network using their staked assets.

- EigenLayer Node Operators: Validators setup up an EigenPod and delegate to an EigenLayer Node Operators who run infrastructure for Actively Validated Services (AVSs)

**II. Basket-based LRTs:(bLRT):**

a. Consolidated staking power: Users deposit holdings from various liquid staking protocols (LSTs) into a single basket-based LRT, simplifying staking diversification.

b. Considerations: While convenient, basket-based LRTs introduce additional complexity and risk in managing underlying LSTs. The management of LST weights within the basket must also be taken into account.

**III. Isolated LRTs (iLRTs):**

a. Dedicated LRTs per LST: Users receive a unique LRT for each underlying LST deposited, offering transparency and a controlled risk exposure to the underlying LST a user is willing to get exposure to, while trusting the LRT protocol to earn staking rewards coming from delegating LSTs to EigenLayer node operators running infrastructure for AVSs.

In conclusion, as we navigate the market's early days, it's evident that these three categories of LRTs (Liquid Restaking Tokens) are on the cusp of cementing a significant presence in the overall framework. 
Each category uniquely embodies a distinct risk profile, intricately tied to the nuances of protocol management and the efficacy of validators' performance. 

This differentiation not only highlights the diverse nature of LRTs but also underscores the critical role that both management strategies and validator performance play in shaping their market trajectory and stability. As the market evolves, the impact of these factors will undoubtedly become more pronounced, setting the stage for a dynamic and potentially transformative phase in the LRTs sector.


Liquid Restaking is a burgeoning sector poised to attract a new line of liquid (re)stakers. Understand the three categories of restaking and the risks and opportunities of the same.

large_3_LRT_Categories_Cover_b67110bbde.png

medium_3_LRT_Categories_Cover_b67110bbde.png

small_3_LRT_Categories_Cover_b67110bbde.png

thumbnail_3_LRT_Categories_Cover_b67110bbde.png

3_LRT_Categories_Cover_b67110bbde.png

A Comprehensive Guide to the 3 Liquid Restaking Token Categories: Navigating the LRT Landscape

_EigenLayer is a middleware protocol developed on top of Ethereum, introducing an extensive network enhancement through a novel cryptoeconomic concept called restaking. This restaking ecosystem is composed of three main components: restakers, operators, and actively validated services (AVS)._

### TL;DR:
- EigenLayer expands the Ethereum capabilities through a unique cryptoeconomic concept called restaking.

- Users will be able to repurpose staked ETH or ETH LSTs (Liquid Staking Tokens) to validate transactions within EigenLayer modules.

- EigenLayer’s [framework](https://docs.eigenlayer.xyz/overview/readme/whitepaper) in the Ethereum blockchain is built upon three fundamental components: restakers, operators, and actively validated services (AVS).

### Exploring the EigenLayer Protocol on Ethereum

[EigenLayer](https://www.eigenlayer.xyz/) introduces a novel approach in the Ethereum blockchain ecosystem, focusing on expanding the network's capabilities through a unique cryptoeconomic concept called restaking. This middleware is essentially a collection of smart contracts on Ethereum, enabling ETH stakers to restake and engage in validating the software modules, deployed on the Ethereum Network.

These software modules can take several [forms](https://www.blog.eigenlayer.xyz/the-three-dimensions-of-programmable-trust/), such as consensus protocols, data availability layers, virtual machines, oracle networks, and bridge technologies. Restaking purpose is to provide security (validation) for this modules, by aggregating the security provided through the process to the full ecosystem.

The EigenLayer framework facilitates the use of staked ETH or ETH LSTs (Liquid Staking Tokens) for the verification of transactions within these modules, rewarding participants with the transaction fees generated, thus creating an incentive for engagement.

Moreover, it lowers the barriers for innovators who previously needed to establish their trust networks for deploying new distributed validation modules. Instead, they can now leverage the established security and decentralization of the Ethereum network, underpinned by ETH restakers through EigenLayer.

![Deep_Dive_into_Eigen_Layer_1_d9e92805ae.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/Deep_Dive_into_Eigen_Layer_1_d9e92805ae_9fa46a7ac4.png)
_EigenLayer Logo. [Source](https://www.eigenlayer.xyz/)_

### Key Components of the Framework

EigenLayer’s [framework](https://docs.eigenlayer.xyz/overview/readme/whitepaper) in the Ethereum blockchain is built upon three fundamental components: restakers, operators, and actively validated services (AVS).

[Restakers](https://docs.eigenlayer.xyz/overview/key-terms) are the first element of this framework and the fuel that powers it. These participants commit their staked ETH or ETH liquid staking tokens (LSTs) to the system, and in return are rewarded for their investment. For those with ETH staked directly on the Ethereum beacon chain, participation is facilitated by creating an [EigenPod](https://app.eigenlayer.xyz/). This is a user-deployed contract that enables native restaking by redirecting the beacon chain withdrawal credentials to EigenPod addresses.

For the users that have their ETH staked on a liquid staking platform (thus in the form of an LST), the approach differs. To restake ETH LSTs, investors can engage directly with the EigenLayer platform or through the [liquid restaking protocols](https://medium.com/@Davos_Protocol/davos-protocol-pioneering-in-lrtfi-a0a2b02e51c8). These protocols allow users to restake LSTs while remaining capital-efficient by minting a wrapped token that represents both layers of yield and the underlying asset.

The second pillar of the framework is the [operators](https://docs.eigenlayer.xyz/overview/key-terms). They are key players who support the functioning of software developed on this platform. Operators allow restakers to delegate their stakes to them, and then select and support various services operating on EigenLayer. Notably, they can also be restakers, as these roles are not mutually exclusive. Operators in EigenLayer have a role akin to validators on the Ethereum network, which makes them responsible for authenticating blockchain transactions.

The final stakeholder is [actively validated services](https://docs.eigenlayer.xyz/overview/key-terms) (AVS). These are systems that need specialized distributed validation methods for verification. This category includes a diverse array of services such as fast finality layers, data availability layers, virtual machines, keeper networks, oracle networks, bridges, threshold cryptography systems, AI inference/training mechanisms, and committees for trusted execution environments.

Each AVS has its unique solution, leading to the development and integration of various AVSs into the ecosystem. An example, that is already in the testnet phase is [EigenDA](https://www.blog.eigenlayer.xyz/intro-to-eigenda-hyperscale-data-availability-for-rollups/), a decentralized data availability layer aimed at boosting Ethereum's scalability and efficiency.

![3.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/3_507cfb43c8.png)
_EigenLayer Framework - Architecture and Stakeholders. [Source](https://docs.eigenlayer.xyz/overview/readme)_

### Restakers and Operators' Roles and Responsibilities

Even though their roles are distinct, both restaker's and operators' activities are closely intertwined. 

Restakers are the cornerstone of the ecosystem. They are the stakeholders that allow EigenLayer to expand Ethereum decentralized trust, and create a marketplace for it. Their participation can either be done directly through the EigenLayer platform, by restaking native beacon chain ETH or an ETH LST, or through liquid restaking protocols, which is a sector with tremendous potential.

Once restakers have committed their assets, they choose operators to allocate their restaked ETH or ETH LSTs. These operators are responsible for validating transactions using the restaked assets. Echoing the role of validators in Ethereum, EigenLayer enforces strict slashing conditions on operators to deter malicious activities.

Thus, the roles of restakers and operators are intricately linked. Operators must maintain high-performance standards to attract restakers, while restakers should undertake comprehensive research and due diligence to protect their investments from potential slashing. This symbiotic relationship is crucial for ensuring the stability and security of the EigenLayer system.

![Deep_Dive_into_Eigen_Layer_3_febb1f09c8.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/Deep_Dive_into_Eigen_Layer_3_febb1f09c8_b5c7944f68.png)
_EigenLayer Delegation Menu. [Source](https://www.blog.eigenlayer.xyz/launch-of-the-stage-2-testnet-eigenlayer-eigenda/)_

### Actively Validated Services

AVSs are central to unlocking the full potential of the EigenLayer ecosystem, offering Ethereum developers an array of innovative opportunities. Earlier in this blog post, we identified them as the software modules that enabled EigenLayer to fulfill its purpose.

AVSs can tap into the programmable trust offered by the Ethereum restake, empowering developers to create and launch an array of blockchain systems and infrastructures. Such systems include fast finality layers, data availability layers, virtual machines, keeper networks, oracle networks, bridges, threshold cryptography systems, AI inference/training mechanisms, and committees for trusted execution environments. Moreover, AVSs hold the responsibility of setting fee rates for the services operating within their framework, with which they will later pay to the restakers.

A prime example of an AVS is [EigenDA](https://www.blog.eigenlayer.xyz/intro-to-eigenda-hyperscale-data-availability-for-rollups/), developed by EigenLabs. Currently, in its testnet phase, EigenDA is an AVS designed for horizontal scaling, which allows it to enhance throughput as more operators join, directly addressing one of Ethereum's significant challenges: scalability.

It distinguishes itself as a data availability service layer on Ethereum, boasting its unique economic security and decentralization. It's marked by economic efficiency and offers flexibility and customization in payment models for roll-ups. With its innovative design and integration with Ethereum's trust network, EigenDA aims to be resistant to censorship.

While EigenDA represents just the beginning of what's possible within the EigenLayer ecosystem, it already highlights the transformative impact EigenLayer is poised to have on the broader Ethereum network.

![Deep_Dive_into_Eigen_Layer_4_867af018eb.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/Deep_Dive_into_Eigen_Layer_4_867af018eb_430c9caf73.png)
_Stakers, Restakers, Operators and EigenDA AVS. [Source](https://www.blog.eigenlayer.xyz/launch-of-the-stage-2-testnet-eigenlayer-eigenda/)_

### Final Thoughts

Even though the EigenLayer ecosystem is still in its early days, its purpose is already attracting users' attention. Moreover, with the recent LSTs cap increase, EigenLayer is steadily climbing the ladders of the TVL rankings. 

According to [DefiLlama](https://defillama.com/chain/Ethereum), it is currently sitting in 13th place in the Ethereum ecosystem with a TVL of $1.12 billion, which can increase even more if the recent caps are completely met.

![Deep_Dive_into_Eigen_Layer_5_3fd00d64df.png](https://strapi-tagus.s3.us-west-1.amazonaws.com/Deep_Dive_into_Eigen_Layer_5_3fd00d64df_1dda763580.png)
_EigenLayer Data on DefiLlama. [Source](https://defillama.com/chain/Ethereum)_

Additionally, EigenLayer's goal of establishing a decentralized trust marketplace, where innovators can draw security to support their applications, promises to be a game-changer compared to the current landscape.

We foresee this marketplace to be largely adopted, and to be the ground running infrastructure for the future of blockchain dApp.s.

The future is looking bright for EigenLayer and inherently for Ethereum. As we see this infrastructure grow, we expect big things from it, unlocking a new level of cross-chain communication and removing some of the largest barriers to permissionless innovation.

EigenLayer is a middleware protocol developed on top of Ethereum, introducing an extensive network enhancement by enabling users to repurpose staked ETH or ETH LSTs to validate transactions on its software modules.

New in Blog

All Articles

.css-1lam8en{color:#2849FF;}New in Blog

All Articles

New in Blog